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Construction Spending Soars in January: 4 Stocks to Buy

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Omicron fears and rising costs had slowed down spending on construction projects during the last few months of 2021. Things seem to be back on track this year, with spending on construction projects increasing in January, beating expectations. This proves that the economy is on track for a recovery, and rising costs haven’t posed much of a threat.

Spending was driven by strong outlays on single-family homes and non-residential structures. In this situation, stocks like D.R. Horton (DHI - Free Report) ,PulteGroup (PHM - Free Report) , KB Home (KBH - Free Report) and Lennar Corporation (LEN - Free Report) are likely to benefit.

Construction Spending Rises in January

The Commerce Department said on Mar 1 that spending on construction projects in the United States rose 1.3% in January at a seasonally adjusted annual rate of $1,677.2 billion and surpassed economists’ expectations of a rise of 0.2%. On a year-over-year basis, construction spending increased 8.2% in January. The jump comes after data for December was revised upward to 0.8% from 0.2% reported previously.

Spending on private construction projects increased 1.5% in January, with outlays on residential buildings climbing 1.3%. Homebuilding once again outperformed the other industries. Construction spending increased 1.2% on single-family homes but decreased 0.1% on multi-family housing developments.

Spending on private and non-residential constructions, such as gas and oil well drilling, jumped 1.8% in January. The good news is that spending on public construction projects also increased in January after declining for the past few months. Spending on PUBLIC construction projects rose 0.6% in January. Also, spending on federal government projects surged 13.8%.

Homebuilding Market on a High

 

The homebuilding market has been on solid ground since the economy started reopening after the coronavirus-induced lockdown in June 2020. Demand for single-family homes has been on the rise despite rising costs of both labor and raw material.

Following a strong 2020, the homebuilding market performed well last year, boosting the construction industry as a whole. Following the spread of coronavirus, millions of individuals have been looking for new single-family homes in less-populated areas to avoid contracting the virus.

As a result, demand for single-family homes has been robust, driving spending on overall constructions projects. Moreover, worries of rising interest rates have made buyers rush to buy homes.

The Fed has indicated that it will go for multiple rate hikes this year. So, people have been scrambling to buy homes before the hikes come into effect.

This saw existing home sales jump in February. The National Association of Realtors (NAR) said on Feb 18 that existing home sales jumped 6.7% in January to a seasonally adjusted annual rate of 6.5 million units, beating analysts’ expectations of a decline of 1%. Existing home sales account for a bulk of the home sales in the United States. This shows the underlying strength in the homebuilding industry that is driving the construction sector.

Although the pace of growth somewhat slowed down in December 2021, homebuilding started the year 2022 on a great note and spending is likely to pick up further as the economy continues to grow.

Our Choices

In terms of overall construction activity, homebuilding remains a bright area. To meet the rising demand for new homes, private residential construction investment has increased, presenting an excellent chance to invest in homebuilding equities.

D.R. Horton is one of the leading national homebuilders, primarily engaged in the construction and sale of single-family houses in the entry-level and move-up markets. DHI’s operations are spread over 91 markets across 29 states in the East, Midwest, Southeast, South Central, Southwest and West regions of the United States. D.R. Horton’s houses are sold under the brand names D.R. Horton — America’s Builder, Emerald Homes, Express Homes and Freedom Homes.

D.R. Horton’s expected earnings growth rate for the current year is 38.5%. The Zacks Consensus Estimate for current-year earnings has improved 9.4% over the past 60 days.  DHI has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

KB Home is a well-known homebuilder in the United States and one of the largest in the state. KB Homes’ revenues are generated from Homebuilding (accounting for 99.7% of fiscal 2021 total revenues) and Financial Services (0.3%) operations. KBH’s homebuilding operations include building and designing homes that cater to first-time, move-up and active-adult homebuyers on acquired or developed lands. KB Home also builds attached and detached single-family homes, town homes and condominiums.

KB Home’s expected earnings growth rate for the current year is 67.9%. The Zacks Consensus Estimate for current-year earnings has improved 28.9% over the past 60 days. KBH sports a Zacks Rank #1.

PulteGroup engages in homebuilding and financial services businesses, primarily in the United States. PHM conducts operations through two primary business segments – Homebuilding (which accounted for 97.2% as of 2021 total revenues) and Financial Services (2.8%). PulteGroup’s Homebuilding segment offers a wide variety of home designs, including single-family detached, townhouses, condominiums and duplexes at different prices, with a variety of options and amenities to all major customer segments: first-time, move-up and active adult.

PulteGroup’s expected earnings growth rate for the current year is 38.6%. The Zacks Consensus Estimate for current-year earnings has improved 15.8% over the past 60 days. PHM has a Zacks Rank #2.

Lennar Corporation is engaged in homebuilding and financial services in the United States. LEN’s reportable segments consist of Homebuilding, Lennar Financial Services, Rialto and Lennar Multifamily. Despite the varied product portfolio, homebuilding remains Lennar’s core business.

Lennar Corporation’s expected earnings growth rate for the current year is 10.9%. The Zacks Consensus Estimate for current-year earnings has improved 3.9% over the past 60 days. LEN carries a Zacks Rank #2.